US – China Trade War Inspires Vietnam Growth
As the trade war between the US and China shows no signs of abating, Vietnam has progressively ramped up manufacturing, attracting foreign investors and increasing exports to the US.
The country’s real GDP climbed by 6.79 percent on the year during the first quarter of 2019 as per official government data. It also enjoyed the second strongest first quarter growth in the past decade, surpassed only by 7.45 percent in 2018. Exports to the US jumped by 26 percent on the year in the first year.
This is despite import duties imposed in March 2018 by the US on Vietnam’s steel products. The tariffs were imposed to prevent steel products that originated from China that attempted to bypass anti-dumping rules. The Vietnamese government, subsequently, issued new regulations related to the origin of exported and imported goods.
The apparel industry performed particularly well, followed by textile companies moving operations to Vietnam from China. The developments came even with China’s economy slowing down, reducing Vietnam’s export to the country by 7 percent. Analysts from the Mizuho Research Institute say that even if the global economy slows down, companies relocating from China to Vietnam is expected to continue.
Vietnam’s economy is being driven by consumer spending, which accounts for close to 70 percent of its GDP. With the third largest population in ASEAN, and the expansion of upper and middle-income earners, the economy is expected to grow further. Manufacturing in itself grew by 12.3 percent.
The US was Vietnam’s biggest export market, followed by the EU and China. However, Vietnam also spent US$57.98 billion on importing goods in the first quarter up 8.9 percent. Major import products included equipment and material for production, electronic products and computer components.
A survey by the American Chamber of Commerce in Guangzhou showed that Chinese companies were losing market share to companies in Asia, but in particular to Vietnam.
Several companies, particularly those making furniture, refrigerators, and car tires moved production to Vietnam, South Korea, Taiwan, and Mexico due to the ongoing US – China trade war.
Most recently, Ohio-based Cooper Tire and Rubber Co formed a joint venture with Sailun Vietnam Co Ltd to build a tire factory near Ho Chi Minh City, while another US company Key Tronic Corporations signed an agreement to lease a manufacturing facility near Da Nang.
Infrastructure development has been the number one priority for the government. Approximately 99 percent of the population now has access to electricity, up 14 percent since 1993. The government is also spending a significant amount to expand roads, real estate, ports, bridges and on aviation.
Challenges for foreign investors
While several companies have moved operations to Vietnam, new investors continue to find it challenging. This is because of the lack of the same level of manufacturing infrastructure in China, as well as the quality of sourcing materials. At present, Vietnam’s infrastructure and supply chain network, and suppliers represent what China was a few years ago; this is something that the government will need to work on.
Products that require a high level of technical precision, like aerospace parts for example, might be harder to source in Vietnam. A simple search for suppliers of plastic, for example, on an online website yields a small number of potential Vietnam manufacturers as compared to China.
Further, China’s wages have risen 60 percent since 2011, which has put a strain on profits, particularly for labor-intensive industries. Still, Vietnam’s wages tend to be low at US$120 to US$170 per month depending on the region, as compared to US$315 in Guangdong and US$350 in Shanghai.
Vietnam has a relatively stable government, and cheap wages. In 2018, it unseated Singapore as Southeast Asia’s top grossing market for initial public offerings. In 2010, Vietnam surpassed China for the first time as the leading producer of Nike shoes.
In the Ease of Doing Business report by the World Bank, Vietnam’s rank of 69 fares better than China’s 78. China typically regulates investment three times more restrictively than Vietnam across nine sectors, including manufacturing.
Vietnam recently ratified the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and is working on the EU-Vietnam (EVFTA) free trade agreement which will allow more FDI into the country with lower tariff structures.
Vietnam’s closer proximity to China, along with its location in the ASEAN region, allows manufacturers to sell and move equipment quicker across the border. This not only helps companies sell and move goods and equipment from China to Vietnam and vice versa, but also helps facilitate trade with its ASEAN neighbors.
Reforms Vietnam is Pursuing
Vietnam will need to continue to invest in hi-tech manufacturing, and infrastructure. It will have to facilitate SME development to align further with global supply chains. The government is also looking at disinvesting state-owned enterprises (SOEs) which are at times marred with corruption and lack of accountability. Corporate governance will also need to be improved to be on par with international standards.
Vietnam offers a steady business environment, particularly for those looking to trade in ASEAN and larger Asia Pacific region. The market is also suitable for investors looking to use its favorable business environment to sell their products to the US and EU.
The future impact of the trade war
Nine months into the US – China trade war, and with frosty relations between the two countries ongoing, foreign companies have found it pertinent to move operations elsewhere from China.
The tariffs have especially affected small and medium sized businesses who have seen costs jump. This has resulted in businesses working with suppliers to find alternate countries such as Vietnam to bypass the tariffs. Several others are starting to take control of their supply chains using local expertise.
However, it is important to note that instead of abandoning the Chinese market, investors are choosing to supplement Chinese operations with low-cost input sources from markets such as Vietnam.
Vietnam is clearly benefitting from the trade war and is emerging as an alternative favorite for companies, but the government still has its work cut out to keep Vietnam competitive, while further improving its business environment.
With a flurry of companies moving operations to Vietnam, costs for land, taxes, wages and automated production lines are also steadily rising. Foreign investors looking to enter Vietnam must work with local experts to ensure their businesses are able to reap a return on investment.